Question

Green Corporation, a manufacturing company, hired several executives during 2020. The executives had homes in other cities when they were hired by Green. If the executives were unable to sell those homes, they would be unable to buy replacement homes in Green’s area. Consequently, if the executives were unable to sell their homes within 30 days of listing them for sale, Green bought the homes from the executives for 10% less than the list price. Green immediately put the homes purchased up for resale. Each home Green purchased was ultimately sold at a loss. By the end of 2020, Green did not own any homes, but had suffered losses totaling $125,000 on the sale of houses. Green is uncertain how to report the sale of the homes. Green has a $32,000 short-term capital gain from stock investment transactions during 2020.

Would Green Corporation prefer the $125,000 loss from the sale of the houses to be treated as ordinary or capital? Why?

What is the proper treatment of the $125,000 loss (ordinary or capital)? Provide an explanation of your answer that is sufficiently supported by tax authorities that are properly cited.

Green Corporation has asked you how it might structure future transactions involving transferred executives and their residences to achieve better tax results. Provide an explanation of your answer that is sufficiently supported by tax authorities that are properly cited.

Answer 1

1. Would Green Corporation prefer the $125,000 loss from the sale of the houses to be treated as ordinary or capital? Why?

Ans : Green Corporation would prefer $ 125,000 loss to be treated as ordinary since the capital loss can be set-off against capital gain and not against ordinary income

2. What is the proper treatment of the $125,000 loss (ordinary or capital)? Provide an explanation of your answer that is sufficiently supported by tax authorities that are properly cited.

Ans : The proper treatment is "capital loss" since Green company have first purchased house from employee and thereafter sold the same hence the transaction have been carried out on his own account for purchase and sale of house. Since Green is not in a business of purchasing and selling house, hence the income / loss from this activity will be treated as capital gain

3. Green Corporation has asked you how it might structure future transactions involving transferred executives and their residences to achieve better tax results. Provide an explanation of your answer that is sufficiently supported by tax authorities that are properly cited.

Ans : Green Corporation should not buy the house from employee in first instance. It should try to sell the house and if any loss arises than list price, Green corporation might provide reimbursement to employee for the loss they suffer. Further in case employee wants funds earlier than when Green Corporation sells the house, they can advance certain fixed amount of list price -- neither green corporation nor employees will be worse off in this situation and for all reimbursement made by Green Corporation would be able to treat it as ordinary business expense. It would be important to document this in offer letter with employees so that Green Corporation can establish that reimbursing loss suffered by employee on sell of house is their obligaiton to meet and the only purpose is to attract right talent.